&euro;6bn French car bailout comes with strings attached

The French government yesterday offered to give up to €6bn (£5.5bn) to the country's struggling car industry, but only if companies promised to keep all domestic plants open.

In return for the aid package – to be finalised in the next few days – automobile companies, including the giants, Renault and Peugeot-Citroën, will also be asked to forswear bonuses for executives and to freeze share dividends.

The president of Peugeot-Citroën, Christian Streiff, said that an injection of liquidity was urgently needed, but warned that the state should not tell car companies how to run their businesses.

A predicted 15 per cent slump in European car sales this year and a freeze on cheap new credit lines from banks has left parts of the French automobile industry – especially the smaller parts manufacturers – struggling for survival.

At the start of an industry summit in Paris yesterday, the Prime Minister, François Fillon, said that the government was ready to bail out an industry which employs 2,500,000 people – one in 10 of all wage-earning jobs in France.

But he warned that the industry should not expect a blank cheque. "There is no question of the state helping out a manufacturer which might decide to close outright one or more plants in France," he said.

The industry minister, Luc Chatel, said that the government was ready to provide from €5bn to €6bn to help the "short-term cash problems" of the industry. In return, it would demand a freeze on plant closures, executive bonuses and shareholder dividends.

Officials suggested that the aid would be available to all car firms with factories in France, including foreign companies like Toyota and Smart. The aim would be to replace credit from banks, now available only at exorbitant rates of more than 8 per cent. The government cash would allow companies to invest in new products but also to provide credit to car showrooms and to car buyers.

M. Fillon, said that he expected to receive approval for the aid package from the European Commission but urged Brussels to speed up its process of decision-making. "When there is a fire, you have to act rapidly," he said.

Car company executives welcomed the announcement – with several provisos of their own. A promise not to shut French plants should pose no problem, but industry executives are unwilling to allow government – in M. Streiff's words – to "substitute itself for management" by imposing a freeze on bonuses and dividends.

Car industry executives also want the government to force banks to pass on their own state bailouts and restore the cheap credit which is the car industry's life-blood.

Renault and Peugeot-Citroë*have already been given €500m each by the government to ease their credit problems. Compared to other European countries, French car sales have been kept relatively buoyant in the past year by a government "scrap" bonus to motorists who switch to greener cars.

All the same, the automobile summit was told yesterday, the French industry is struggling with long-term, as well as short-term, problems. Even before the present crisis, it suffered from 20 per cent overcapacity and a 30 per cent shortfall in competitiveness compared to German firms.